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BoJ Clearly Removed the Sting Out of the Normalization Debate


The ECB took center stage yesterday. Several speeches from high-profile policymakers were due, including Dutch governor Knot and president Lagarde. Both stuck to the hawkish line set out at the December meeting. That message was later reinforced by the publication of that meeting’s minutes. Governors were not at all amused with market conditions having eased at that time, saying it was incompatible with bringing inflation back to target. The eventual 50 bps hike combined with strong guidance of more similar-sized hikes to come also was a clear compromise between the large number of members preferring a 75 bps move & some wanting a quicker starting QT pace and the rest of the committee. The core bond yield decline came to a halt. Bunds underperformed USTs with yields grinding 0.9 bps  (30y) to 6.5 bps (2y) higher. US yields rose 3.9-4.4 bps in the 2y-5y segment and over 2 bps at the long end of the curve. Fed vice-chair Brainard held a balanced speech saying risks are becoming more two-sided, referring to cooling wages and consumer demand but stressing the need for higher rates for longer. Stock markets lost ground, especially in Europe but the dollar failed to capitalize on that. DXY barely kept the 102 barrier. EUR/USD rose back above 1.08. Sterling initially defied the risk-off again. But some profit-taking action took place when EUR/GBP hit support at 0.8721 (April 2021 correction high/June 2022 interim high).

The Japanese yen is underperforming in a risk-on session. Inflation rose to the highest in decades (see below) but the BoJ clearly removed the sting out of the normalization debate, for now at least. USD/JPY advances to above 129 and yields in the region again point downwards (10y reference yield -3.6 bps to 0.4%). China’s yuan eases a tad (USD/CNY 6.78) after the PBOC, with today’s injection included, flushed the local market with a record amount of short-term cash this week ahead of the Lunar NY holidays next week. NY Fed Williams sided with the rest of the colleagues arguing for further tightening in order to get sufficiently restrictive rates. US yields this morning add a few more bps.

It’s the final day at the WEF in Davos today. It’s again packed with central bank speeches though we don’t expect them to hold any additional information. Their message is clear and it’s up to markets to either embrace or keep ignoring it. We’ve seen core bond yields bottoming yesterday but it is all very preliminary. And recent evidence has shown that it doesn’t take much (usually one bad data release) to thwart the process, especially in the US. The 10y yield over there should take out 3.50% asap and preferably the 3.58/63% area soon thereafter to flip the technical picture but that’s more than a day’s work. It’s also a prerequisite for the dollar to sustainably recover (through interest rate support and risk aversion). UK retail sales end the data-heavy week on a disappointing note. (Core) retail turnover in December dropped 1(.1)% m/m to be 5.8% (6.1%) lower y/y. The numbers defied a hoped-for rebound after already declining in November. It’s a conflicting element for the Bank of England after a solid labour market report and still-double digit inflation earlier this week. Sterling extended an early fall. EUR/GBP rises to 0.876.

News Headlines

Japanese national inflation accelerated for both the headline and the core (ex. fresh food) reading gauge to 4% Y/Y, respectively up from 3.8% Y/Y and 3.7% Y/Y. The headline figure hit this barrier for the first time since 1991. For the core measure we have to go back to December 1981. The even narrower index which filters energy as well, increased from 2.8% Y/Y to 3% Y/Y. The inflation data add to (market) pressure on the Bank of Japan to take a next step in its monetary policy normalization process. They unexpectedly increased the tolerance band around the 0% YCC target for the 10-yr yield from 25 bps to 50 bps at the end of December, but refrained from taking a next step at Wednesday’s policy meeting with governor Kuroda sticking to his line that inflation is mainly driven by the higher cost of energy. Kuroda’s term ends after the next, March, policy meeting with some expecting the BoJ’s U-turn under a new governor in April.

UK GfK consumer confidence unexpectedly fell from -42 to -45 in January. It continues hovering near all-time lows (-49 Sept2022). Details showed a deterioration in all sub-components apart from “personal finances next 12 months” (-27 from -29). “Climate for major purchases” and “Saving Intentions” showed the biggest declines, dropping 6 points to respectively 14 and -40.

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